(The following statement was released by the rating agency)
NEW YORK, January 25 (Fitch) Fitch Ratings has today affirmed the ratings for
National Bank of Canada's (NBC) at 'A+/F1'. The Rating Outlook remains Stable. A
full list of rating actions follows at the end of this press release.
This rating action follows Fitch's periodic review of the Canadian Banks Peer
Group, which includes Bank of Montreal (BMO), Bank of Nova Scotia (BNS),
Canadian Imperial Bank of Commerce (CIBC), Caisse Centrale DesJardins (CCD),
National Bank of Canada (NBC), Royal Bank of Canada (RBC) and Toronto-Dominion
Bank (TD).
For further discussion, please refer to the Canadian Banks Peer Review Special
Report to be published shortly.
KEY RATING DRIVERS
IDRs, NATIONAL RATINGS AND SENIOR DEBT
National Bank of Canada's (NBC) ratings reflect the company's strong asset
quality and stable operating performance. NBC's ratings are further supported by
its ample liquidity profile and favorable market share in its primary market of
Quebec. They are constrained by lower regulatory capital levels and limited
company profile relative to higher rated Canadian bank peers. As the smallest of
the 'Big Six' Canadian, NBC lacks the scale and geographic diversity benefiting
larger Canadian competitors.
During 2015, NBC reported solid earnings driven primarily by continued growth in
earning assets and wealth management. The wealth management segment in
particular reported a significant increase in income from both organic growth
and earnings realized from its acquisition of TD Waterhouse Institutional
Services. Fitch views NBC's continued success in the wealth management
positively as it underscores management's successful execution of a disciplined
strategy to expand its wealth management platform across Canada.
NBC's asset quality continues to outperform Canadian banking peers. Like
Canadian bank peers, NBC's asset quality performance has benefited from the
continued strength of Canada's economy. Given cyclical lows on impaired loans
and credit losses coupled with historically high consumer indebtedness, Fitch
expects some level of asset quality deterioration as economic growth slows and
credit conditions normalize.
NBC's ratings are also supported by the bank's strong market position, deposit
market share and brand recognition in its primary market of Quebec. Fitch
generally views the Quebec economy as less volatile given its slightly weaker
historic growth and lower household indebtedness relative to the broader
Canadian economy. While NBC's franchise in Quebec presents some competitive
advantages in its core market, NBC is particularly sensitive to any
idiosyncratic stress in Quebec's economy due to its relative lack of geographic
diversity.
NBC's ratings continue to be constrained by lower capital levels and weaker
profitability than Canadian banking peers. While Fitch views NBC's capital as a
sufficient cushion in an adverse economic scenario, NBC is more vulnerable in
severe stress tests than higher rated peers given its lower capital base.
Furthermore, NBC's earnings profile includes a growing portion of revenue
derived from financial markets segment, which Fitch views as a more volatile
sector.
SUPPORT RATING AND SUPPORT RATING FLOOR
The affirmation of the NBC's Support Rating (SR) of '2' and Support Rating Floor
(SRF) of 'BBB-' reflect Fitch's view that the likelihood of support remains
relatively high for Canadian Banks due to their systemic importance in the
country, significant concentration overall of Canadian banking assets amongst
the institutions noted above, which account for over 90% of total banking
assets, the large size of the banking sector with banking assets at 2.1x
Canada's GDP, and the Canadian banks' position as key providers of financial
services to the domestic economy.
In Fitch's view, Canadian banking authorities through the CDIC Act, have wide
latitude to resolve a troubled bank including re-capitalizing an institution,
creating a bridge bank, or imposing losses on creditors.
Fitch recognizes that the government's willingness to provide support for
D-SIFI's in Canada has been reduced demonstrated by Department of Finance
consultation paper which outlines the proposed bail-in regime as Canadian
banking regulators seek to protect tax payers from the risk of a large financial
institution failing. This is evidenced by the issuance of non-viability
contingent capital (NVCC) instruments, resolution powers given regulatory
authorities under the CDIC Act, and other initiatives that demonstrate the
Canadian government's progress to reduce the propensity of state support for
banks going forward.
NBC's IDRs and senior debt ratings do not benefit from support because their
Viability Ratings (VRs) are all currently above their SRFs.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by NBC and its subsidiaries
are all notched down from the common VR in accordance with Fitch's assessment of
each instrument's respective non-performance and relative loss severity risk
profiles, which vary considerably.
NBC's subordinated debt is notched one level below its VR of 'aa-' for loss
severity in accordance with Fitch's assessment of each instrument's respective
non-performance and relative loss severity risk profiles.
The preferred securities of NBC Asset Trust are non-cumulative preferred
securities which are notched five below the VR, made up of two notches down for
non-performance and three notches down for loss severity.
SUBSIDIARY AND AFFILIATED COMPANY
All of the subsidiaries and affiliated companies including National Bank of
Canada New York are reviewed as part of the Canadian Bank peer review factor in
a high probability of support from parent institutions to the subsidiaries. This
reflects that performing parent banks have very rarely allowed subsidiaries to
default. It also considers the high level of integration, brand, management,
financial and reputational incentives to avoid subsidiary defaults.
RATING SENSITIVITIES
IDRs, NATIONAL RATINGS AND SENIOR DEBT
NBC's ratings are solidly situated at their current level. However, significant
growth into new markets outside Canada or outsized growth in new, higher risk
segments could potentially pressure the ratings.
NBC's ratings are highly sensitive to the company's stable earnings and credit
quality. Outsized losses and or performance volatility with respect to NBC's
financial markets business would be viewed negatively, particularly if the
business grows to represent a significant portion of NBC's revenues. Moreover, a
housing shock concentrated in the province of Quebec that results in adverse
loan performance and capital impairment may also result in a negative credit
action.
SUPPORT RATING AND SUPPORT RATING FLOOR
SR of '2' incorporates Fitch's expectation that there could be some level of
support for Canadian Banks going forward although this has been weakened given
credible resolution framework. Although Canadian authorities have taken steps to
improve resolution powers and tools, they maintain a flexible approach to bank
resolution.
Fitch's assessment of continuing support for Canadian D-SIFI's has to some
extent relied upon resolution powers granted regulators under the CDIC ACT as
well as the potential size, structure, and feasibility of NVCC implementation.
Fitch's view on support could change should the CDIC Act diminish powers of the
CDIC to recapitalize a failing institutions leading to a downgrade of the SR and
SRF.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The subordinated debt and hybrid capital ratings are primarily sensitive to any
change in the VRs of the banks (or bank subsidiaries).
The preferred securities of NBC Asset Trust preferred securities, which Fitch
gives five notches from NBC's VR given management and regulatory authorities'
powers to suspend dividends.
SUBSIDIARY AND AFFILIATED COMPANIES
The subsidiary and affiliated company ratings including National Bank of Canada
New York Branch are primarily sensitive to any change in the VRs of the banks.
Fitch has affirmed the following ratings with a Stable Outlook:
National Bank of Canada
--Long-term IDR at 'A+';
--Short-term IDR at 'F1';
--VR at 'a+';
--Senior debt at 'A+';
--Subordinated debt at 'A';
--Preferred stock at 'BBB-';
--Short-term deposits at 'F1';
--Support Rating at '2';
--Support Rating Floor at 'BBB-'.
National Bank of Canada New York Branch
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
NBC Asset Trust
--Preferred Stock at 'BBB-'.
Contact:
Primary Analyst
Doriana Gamboa
Senior Director
+1-212-908-0865
Fitch Ratings, Inc.
33 Whitehall
New York, NY 10004
Secondary Analyst
Justin Fuller, CFA
Senior Director
+1-212-368-5472
Committee Chairperson
Christopher Wolfe
Managing Director
1-212-908-0771
Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email:
hannah.james@fitchratings.com.
Additional information is available on www.fitchratings.com
Applicable Criteria
Global Bank Rating Criteria (pub. 20 Mar 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501
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